The impact of inflation on small businesses has been harsh and is likely to continue through 2023

Economic growth in the US has slowed significantly in 2022, and that slow growth is expected to continue into next year. After contracting slightly in the first half of this year, real gross domestic product rebounded in the third quarter to an annual growth rate of 2.6%. However, according to Christopher J. Waller, a member of the Federal Reserve Board of Governors, this was only a temporary boost, and weak growth has returned in the last quarter of 2022 and will persist through 2023.

Consumer and business spending has softened amid deteriorating business confidence in most sectors of the economy, Waller said at the 59th Annual Economic Forecasts Luncheon, Phoenix, Nov. 16. It’s not hard to see why: inflation remains high, something people notice every day. at gas stations and grocery stores. Also, as the Fed tries to bring inflation down to its 2% target, it has raised interest rates, raising borrowing costs for both businesses and consumers.

Inflation is a result of pent-up demand arising after COVID-related shutdowns, supply chain issues, rising labor costs, and rising gasoline prices, among other factors. Stimulus money put more cash in the hands of consumers, who naturally spent it, thus stimulating inflation. The slowdown in economic growth is a sign that the monetary policy of raising interest rates, in place since late 2021, is starting to work but will take time.

The latest Consumer Price Index (CPI) report found a slowdown in the pace of price increases but, according to Waller, it is too early to deduce that inflation is heading down sustainably. The Fed is likely to try to cut it aggressively by raising interest rates again. After all, over the past nine months, the FOMC has raised the target range for the federal funds rate from near zero to 3-3/4 to 4%, a historically rapid rate of increase.

All of this puts small business owners in a difficult situation. On the one hand, they are suffering from a tight labor market, which has driven up wages and increased costs of goods sold. Many small business owners feared raising prices further, as that may have a negative effect on demand, but at the same time, their margins have been squeezed.

These economic realities increase the challenges for small businesses seeking working capital today and plans for future growth. The latest Biz2Credit Small Business Lending Index found that approval rates for business loans at big banks fell to 14.7%, a setback for the second month in a row. Even as the economy has steadily recovered from pandemic lockdowns, approval percentages are still about half of what they were before COVID hit the United States.

Additionally, in February 2020, small banks approved more than half of the business financing applications they received. Now that figure is 21.2%. Interest rates are higher and loans are more difficult to obtain, in part because cost structures have reduced the profitability of smaller businesses.

Half of small businesses (50%) say inflation is the biggest challenge facing small businesses right now, according to the US Chamber of Commerce. The chamber also reported that to deal with inflation, 7 in 10 small businesses increased prices in response to inflationary pressures, followed by those that said they had taken out a loan (40%), reduced staff (37%), or reduced the quality of their products or services (31%).

More than three-quarters of small business owners (76%) say they have a plan to adapt to a changing economy, and a large majority (61%) believe the economy is changing faster now than ever before. A considerable percentage (40%) say they are very concerned about the impact that the increase in interest rates has on their business.

There is no question that times are tough for small business owners right now. It is important to consider the resilience of American entrepreneurs. They have endured an unprecedented pandemic followed by record inflation. In fact, the strong are surviving. The holiday season is upon us and consumers are still willing to spend their money. Even if sales sales are strong, higher costs will reduce profitability. It’s too early to say things are merry and bright this holiday season, but if labor, fuel, and commodity costs don’t start to come down, small businesses may find themselves in a slump over the next year.

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